Chapter 2 Quiz 2

A trial balance is a list of accounts and their balances at a specific point in time. It is used to ensure that the debits and credits in the accounting system are equal and in balance. The purpose of a trial balance is to detect any errors in the recording or posting of transactions before preparing financial statements. It is an important tool in the accounting process and helps in ensuring the accuracy of the financial information.

A debit to an expense account indicates an increase in expenses incurred. Expenses are costs that a business incurs in order to generate revenue. When an expense is incurred, it is recorded as a debit to the expense account, which increases the total amount of expenses for the business. This helps track and calculate the overall expenses of the business, which is important for financial analysis and decision making.

An entry on the right hand side of an account is considered a credit. In accounting, credits are used to record increases in liability, equity, and revenue accounts, as well as decreases in asset and expense accounts. It is important to note that credits and debits are two sides of the same coin in double-entry bookkeeping, where every transaction has an equal and opposite effect on both sides of the equation. Therefore, a credit entry on the right hand side of an account indicates an increase in the specific account it is recorded in.

Notes payable is a liability account because it represents the amount of money that a company owes to its creditors. The normal balance for a liability account is credit, which means that an increase in notes payable is recorded as a credit entry. This reflects the fact that the company has incurred a debt and has an obligation to repay it in the future.

A journal does not keep all the information about changes in specific account balances in one place. Instead, it records the individual transactions in chronological order, including the debit and credit amounts for each entry. The purpose of a journal is to provide a complete and detailed record of all transactions, which can then be used to prepare financial statements and analyze the financial position of a business. The information about changes in specific account balances is usually summarized and organized in a separate ledger.

A debit to a liability account indicates a decrease in a liability. This means that the company has either paid off a portion of its debt or has reduced the amount owed. Debit entries in liability accounts are used to record decreases in the amount owed by the company. By reducing the liability, the company's financial position improves as it owes less money to creditors.

The correct answer is "analyse, journalize, post in ledger". This sequence of steps is the most common and logical order in the transaction recording process. First, the transactions are analyzed to determine their impact on the accounts. Then, the transactions are journalized, meaning they are recorded in the general journal. Finally, the journal entries are posted in the ledger, which involves transferring the information from the journal to the respective accounts in the general ledger. This sequence ensures that the transactions are properly recorded and organized in the accounting system.

The statement "Revenues are increased by debits" is false. In accounting, revenues are increased by credits, not debits. Debits are used to record increases in assets and expenses, while credits are used to record increases in liabilities, owner's equity, and revenues. Therefore, the correct answer is that revenues are increased by credits.

A complete journal entry includes the date of the transactions, a brief explanation of the transaction, and the accounts and the amounts to be debited and credited. The balance of the accounts in the entry is not included because the journal entry is used to record the individual transactions and their effects on the accounts, not the current balance of the accounts. The balance of the accounts can be determined by summing up the debits and credits in the journal entries and calculating the net balance.

Posting of journal entries should be done in chronological order to maintain a systematic and organized record of financial transactions. By posting entries in the order they occur, it becomes easier to track and analyze the sequence of events and ensure accuracy in the accounting process. This allows for better financial reporting and decision-making based on reliable and up-to-date information.

In accounting, a credit refers to the right side of an account. When recording transactions, credits are used to increase the balance of certain accounts, such as liabilities, revenues, and equity. This is in contrast to debits, which are used to decrease the balance of accounts. Therefore, the correct answer is the right side of an account.

The statement that a trial balance proves that all transactions have been correctly recorded is false. A trial balance only ensures that the total debits and credits in the ledger are equal, which shows mathematical accuracy, but it does not guarantee the accuracy of individual transactions. Errors such as recording transactions in the wrong account or omitting transactions altogether can still result in a balanced trial balance. Therefore, a trial balance is not a foolproof method for verifying the correctness of all recorded transactions.

The correct answer is to analyze each transaction. This is the first step in the accounting cycle and recording process because it involves examining the details of each transaction to determine its impact on the financial statements. By analyzing each transaction, accountants can identify the accounts that are affected, the amounts involved, and the specific journal entries that need to be recorded. This step is crucial to ensure accurate and reliable financial reporting.

The correct answer is Capital account. In accounting, the normal balance for an account refers to whether it increases or decreases on the debit or credit side. For asset accounts, expenses accounts, and drawing accounts, the normal balance is on the debit side, meaning they increase with debits and decrease with credits. However, for a capital account, the normal balance is on the credit side. This means that the capital account increases with credits and decreases with debits.

In a double-entry system, every transaction must have equal debits and credits. This is because the system follows the accounting equation, which states that assets equal liabilities plus equity. Each transaction affects at least two accounts, and the total debit amount must always equal the total credit amount. This ensures that the equation stays in balance and maintains the integrity of the financial records. Therefore, the amount of the credits must equal the amount of the debit in order to maintain the accuracy of the accounting system.